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Dollar slips but U.S. rate expectations give support

Written by: Staff

TOKYO, Apr 10 (Reuters) The dollar slipped on Monday but stayed well above a seven-month low against the euro, underpinned by the view that the Federal Reserve will raise interest rates at least one more time.

Solid March data for U.S. payrolls released on Friday cemented expectations that the Fed will lift its funds rate for a 16th straight time to 5.0 percent at its next meeting in May, pushing the dollar up around 1 percent against the euro.

The jobs outcome also convinced more investors that the central bank would raise rates again after May, but as future monetary policy depends on incoming economic data, investors hesitated to chase the dollar much higher, traders said.

''There is uncertainty about what the Fed will do after interest rates rise to 5 percent as that will be data-dependent,'' said a trader at a big Japanese bank.

''It's difficult to buy the dollar aggressively at the moment so further gains in the dollar could be limited.'' The dollar rallied 15 percent last year against the euro and the yen on the back of a U.S. tightening campaign that kicked off in mid-2004.

By 0040 GMT, the euro was up 0.2 percent at .2110, well below a seven-month peak of .2333 hit last week.

The euro fell sharply after European Central Bank chief Jean-Claude Trichet said that the central bank did not share the same view as the market, which had girded for a clear signal that the ECB would increase interest rates in May.

Against the yen, the euro was little changed at 143.05 yen, well below the 144.88 yen hit on electronic trading platform EBS last week -- the highest since the euro was launched in January 1999.

The dollar was at 118.15 yen, down from around 118.30 yen marked in late U.S. trade on Friday.

Traders said the market would scrutinise a run of U.S. data due this week for clues about the Fed's action beyond May.

Retail sales -- the highlight of the week -- are due on Thursday. Economist expect the data to show sales rose 0.5 percent in March, after a decline of 1.4 percent in February.

The U.S. trade deficit for February is slated for Wednesday and industrial output figures for February are due on Friday.

The market will also pay close attention to what Bank of Japan Governor Toshihiko Fukui says after the central bank's two-day policy meeting ends on Tuesday as his comments could offer clues to the timing of a rate increase, dealers said.

The BOJ is expected to keep its near-zero rate policy unchanged at this week's meeting.

ReutERS VJ VP0625

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